Nick Wright considers how holdover relief can defer the capital gains tax triggered when company shares are gifted to the next generation, and the traps that can restrict it.
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Where the business is to stay in the family, the analysis shifts from price to two different questions: the capital gains tax that a gift triggers in the donor's hands, and the inheritance tax exposure of the shares, which the capping of business property relief from 6 April 2026 has changed fundamentally. Family succession also needs to consider the cash flow needs of the exiting shareholders to fund their retirement. It is not uncommon for the vendors to accept a sale at undervalue provided the proceeds are sufficient to fund their retirement.
A family succession can be built from several components, used singly or in combination. An outright gift of shares is deemed to be a disposal at market value by virtue of TCGA 1992, ss 17 and 18, triggering capital gains tax unless the gain is held over under TCGA 1992, s 165, and is a potentially exempt transfer for inheritance tax. A sale at undervalue taxes the actual consideration and restricts holdover by the excess of proceeds over base cost. A gift into trust attracts holdover under TCGA 1992, s 260 and is an immediately chargeable transfer for inheritance tax, sheltered by the nil-rate band and business property relief (BPR) within the new allowance. A phased succession through a buyout structure or an alphabet share arrangement allows control and income to move separately from capital. Retention to death secures a capital gains uplift in base cost but exposes the value to the capped BPR regime. And a family investment company is a vehicle for the proceeds of a sale rather than for the trading company itself. The components below are examined in turn; the buyout mechanics are at Section 6 and the company purchase of own shares at Section 7.
Gifts of shares and the capital gains problem
A gift is a disposal for capital gains tax. Transactions between connected persons are deemed to take place at market value under TCGA 1992, ss 17 and 18, so the donor is treated as realising a gain measured against the full market value of the shares, despite receiving nothing with which to fund the tax. Family members are connected persons under TCGA 1992, s 286 – spouse or civil partner, ancestors, lineal descendants, siblings and their spouses among them. Transfers between spouses and civil partners are the exception: they remain on a no gain, no loss basis under TCGA 1992, s 58, which is why making a spouse a shareholder is so often the first step in family tax planning, both to use a second BADR limit and to spread future value. For every other family member, the answer to the dry charge is holdover relief.
Holdover relief: TCGA 1992, s 165
Holdover relief under TCGA 1992, s 165 applies to a gift, or a transfer at undervalue, of business assets – including shares in a trading company that is unquoted or is the donor's personal company. Its effect is to deduct the donor's gain from the donee's acquisition cost, so that the tax is deferred until the donee disposes of the shares. The relief is claimed jointly by donor and donee (by the donor alone for a gift into trust), within four years, on the basis set out in HMRC's help sheet HS295. Where the donee gives some consideration, the held-over gain is reduced by any excess of the actual proceeds over base cost.
The relief carries restrictions that must be considered carefully. For shares in the donor's personal company, the held-over gain is restricted by the ratio of chargeable business assets to chargeable assets under TCGA 1992, Sch 7, para 7. A ‘business’ asset is defined as an ‘asset used for the purposes of a trade, profession or vocation carried on by the company’ (TCGA 1992, Sch 7, para 7(2)). Investment property on the balance sheet therefore leaks gain into immediate charge – which is why the preparation discussed at Section 3 matters here too, not only on a sale. A long-standing quirk compounds the problem: the definition of business assets for this purpose currently excludes goodwill arising on or after 1 April 2002 – even though it is plainly the goodwill of the trade the company carries on, it is goodwill within the intangible fixed asset regime and therefore not an asset chargeable to capital gains. Draft legislation was published in June 2026 to amend paragraph 7(2)(b) of Schedule 7 to TCGA 1992 to include assets within the intangible fixed asset regime (as well as those that are exempted by the substantial shareholding exemption) as ‘chargeable assets’ for this purpose; this new legislation is due to apply to disposals made on or after 6 April 2027. Take a company incorporated in June 2005 with a total market value of £5m whose only chargeable asset is an investment property with a market value of £500,000. The company’s trade commenced after 1 April 2002, so the goodwill value of £4.5m is not a chargeable asset. The amount of the held-over gain is calculated by multiplying it by the fraction £0/£500,000 = 0, thus, the full gain is chargeable. If the investment property is demerged prior to the gift, there are no chargeable non-business assets, meaning no restriction to holdover relief.
The restriction only applies where the transferor either:
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held 25% or more of the voting rights at any time within the period of 12 months before the disposal; or
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they are an individual and the company is their personal company, again at any time within the period of 12 months before the disposal.
Also, a held-over gain never benefits from the donor's BADR, so where the £1m limit would otherwise be wasted, a part-sale and part-gift should be considered.
Practical point
Make sure both donor and donee sign the holdover election and diarise the four-year claim window; an unclaimed holdover cannot be reinstated once the window has closed.
Case study: A gift of 20% to a daughter
Graham gifts a 20% holding in Hartwell Engineering Ltd (market value £800,000, base cost £20,000) to his daughter Emma, who works in the business. Hartwell's chargeable assets are £3.6m, of which chargeable business assets are £2.7m, the let property and certain investments accounting for the £900,000 difference. Capital gains tax is 24%.
The deemed proceeds under TCGA 1992, ss 17–18 are £800,000, giving a gain of £780,000. Without a holdover claim, the whole £780,000 is chargeable, producing capital gains tax of £187,200 – payable by Graham despite his receiving no sale proceeds – and Emma takes a base cost of £800,000. With an s 165 claim, the held-over gain is restricted to the chargeable business assets proportion: £780,000 multiplied by £2.7m over £3.6m, or £585,000. The chargeable gain is reduced to £195,000, the capital gains tax to £46,800, and Emma's base cost to £215,000. The restriction costs Graham £46,800 of immediate tax that a clean trading company would have avoided. Demerging the property first, as Section 3 describes, removes the restriction and allows the whole gain to be held over.
